Strategy of Profit Booking

In a market like this, which attains a record high daily, a strategy of profit booking is necessary. In other words, Profit Booking is an integral part of stock investing, irrespective of bull or bear market. It remains a grey area of all small investors. When he/she books profits, the stock goes up and vice versa.

Profit booking can be initiated through following indicators -

  1. PE based model :- When PE of a stock reach above a threshold point of industry PE (say 20%) profis can be booked. Bit here we have to miss the wealth creation ability of Page Inds; a textile stock of 60-70 PE.
  2. BV, P/BV based model :- It is better than the first one, but not so good for the growth stock. ITC p/BV is 9, but it is not a" SELL".
  3. Market/Index PE :- If someone is believer of this model, then he/she is waiting today in sidelines!
  4. GOAL/Target based model :- It is popular because it satisfies the EGO of an investor. But, the target fixing is abrupt and not so logical always.
  5. Trailing stoploss method :- When a stock-price increases, a trailing stoploss may be maintained and profits may be booked accordingly. The limitation is, often a average result can sell your growth stock. Just see the Britannia Q4: 2016-17 results; 6% PAT growth and the stock falls. Trailing stoploss is not relevant here.
  6. Asset allocation/ rebalancing of portfolio :- It is a more serious model and should be followed. But for a young, salaried investor of, say 35 years with Govt/Company Provident Fund, need not be too meaningful (as he can afford 100% equity allocation).

I’m not incorporating here the profit booking scenario on Company/Sector specific news, Economic data, War-like situation etc.

Kindly help me to build a strategy on Profit Booking by contributing to this thread. Thanks. Happy investing.

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@hitesh2710 Hitesh ji, will you kindly contribute here?

Some big man had said “Investing is simple but not easy”!
Another one says about second level thinking.
I think the more deep we go into this investment (stock market related) analytics, the far away we go from basics.
Just for sake of finding a answer go through the following -
http://www.valuepickr.com/basics/investing-basics/why-invest/
This helped me.
Stay safe! Stay Lucky!

To make it simple try to find multibagger stock, wait for it to get double .
Sell half the quantity and get your capital for future allocate.
Then you may leave the profit in same stock for further upside.
Here the benefits are that your appatite to hold a stock for longer period will increase which may give further gains.

I will quote a paragraph from a book that I read recently:

“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept telling other customers, ‘Well you know this is a bull market!’ he really meant to tell them that the big money was not in the individual fluctuations but in the main movements–that is, not in reading the tape but in sizing up the entire market and its trend.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money."

If you don’t know this already, it is from “Reminiscences of a stock operator”. It is almost a 100 year old book which I found to be really relevant today as well.

Coming back to profit booking, it will greatly depend upon your investing style. If you are a real long term investor then you should sit on your positions till you continue to see growth which you had envisaged in the first place. You should sell when you really need money to bear some expenses or when you have identified opportunities which can probably give you a much better return than the current investment. Obviously this should be looked in conjunction with overall market conditions. While India is in a great bull market, one should sell if situations like 2008 reoccur.

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Strategy of profit booking can be different for each category, also depending on ones expectations and risk taking capacity.

Multibaggers - For stocks in which I believe there is 3-5 years growth story, I try to book 25% at 100% appreciation and another 25% at 200% appreciation.

Less than 100% upside - For stocks where I feel the upside is limited and the growth is average or visibility is less, I try to book 20% profit at 50% appreciation and another 30-40% profit at 100% appreciation.

I’d also love to hear from other senior folks in the forum on this question. i couldn’t really find what respectable investors like Charlie, Warren, Peter etc have to say on this.

I recently sold half of my holding in canfinhomes at 6x in the hope of entering again at somewhat cheaper valuation. Personally I am satisfied with the decision and I was also okay just sitting on it for even longer but for the purpose of having some discipline in the my investment habits I trimmed my position.
Now I am questioning myself if this really is the right strategy. Should we just sit tight in case we believe in long term story and ignore presumptive stretched valuations or do we book profit and wait before taking a call on averaging-up or down.

What do people think? tagging @Donald @hitesh2710 @ayushmit

I am happy to have found this thread, I started investing recently and I have a couple of shares that have given me 2X. I was wondering on when to exit stratergy, though I am in no hurry to book profits or exit, when to book profits or exit has been a real challenge than what to stock to buy or when to buy.

Cheers
G1

Very true! It has been a real challenge for me as well. Since I don’t get much time to monitor the stocks closely, I have devised a method to suit my needs. Most of my stocks are compounders for long hold. So I do partial booking after one year hold(like systematic withdrawal) upto a maximum of 3%of individual stock allocation in the pf. Later I buy back the shares as it comes in my buy zone. For this I use short term signals from charts. So this way my average buy price keeps going up. But I will try to maintain MOS of about 10 to 15 % from CMP. Also I will make sure that the overall pf is having a margin of safety of about 15 to 20%. So if there is a black swan event, pf should be ok. This method has worked for me nicely. Since April '17 I have almost booked 10% of the portfolio and reinvested in other opportunities.

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Do you book profit and re-invest in safer/undervalued opportunity or simply hold cash to reinvest at a later point of time. I understand it is going to be situational most of the time but what is the general strategy you follow?

I reinvest based on the prevailing promising theme. Recently reinvested in financials esp housing/pvt banks, fmcg and agro/chemical themes. I do it only if I have margin of safety. For me holding cash is very difficult.

Wouldnt that make the number of shares go up every time you reinvest? How do you monitor so many shares.

I guess there can never be a perfect strategy because no one can perfectly time the market. I had bought maruti at 1100 and sold it off for 2500. I felt so great ! But now maruti is at 7000+ ,and i do feel bad. But i am still satisfied because i feel opportunity loss is better than real loss ( not sure this is right or wrong ,but i feel so). Limited funds is a roadblock for me and this is what i follow -

  1. Suppose i target to own 50 qty of a stock. If i have a strong conviction for the stock in short to medium term i buy 200 qty of the stock. For this i use my bullet fund. I use the bullet fund to invest in the one of the stocks in my portfolio. (Bullet fund :- a lump some amount set aside to pump in any one stock of the portfolio which has max potential in short to medium term.)
  2. If the stock gains on expected lines , i sell off the additional 150 units i had bought and booked profit = value of 50 units. So basically my 50 units are for free. I then have this bullet fund to invest in a new stock.
  3. If the stocks tanks 10% , i immediately withdraw my bullet fund. This is where conviction helps and i stick to this rule. Kindly note that only the bullet fund is withdrawn.
  4. Long term investing is surely good and i wish to develop the patience for it. However i still feel booking regular profits is crucial. I plan to be a long term investor (hold stocks for long term) when my portfolio value is atleast 50 lakhs. Till that time booking profits makes sense for me.
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Well said…as retail investors we are not privy to early news flow which actually gets reflected in the price action(need not be all the time). So if we can ride the market sentiment we will not be off the track majority of times. In order to make it safer do systematic buy/sell(very small quantities daily or weekly). I start profit booking regularly after one year of hold only due to 1. I didn’t want to pay STCG. 2. I really don’t know when to sell! After about 5 to 6 years of regular systematic buying and selling, of course based on chart signals, I can say that it has worked for me. Though brokerage is on the higher side due to the constant churning. I usually maintain the same set of stocks, although the allocation keeps changing from 3 to 10%. If it goes below 3%, I will get out of it. I will try to keep the highest allocation around 10 to 12% even if it runs higher(trimming once it gets tired!)

I am yet to figure out the art of selling. Currently I sell when -

  1. The risk/reward ratio looks asymmetric. Conversely I buy when the reward/risk ratio looks asymmetric
  2. When the cost of being wrong can be high and can set me back by a substantial amount
  3. When I realize that my hypothesis was wrong or that the stock does not deserve a place in my portfolio

In situations (1) and (2) I sell 15-20% of the position if I am bullish about the long term prospects of the business, else the sell % will be higher

In situation (3) I exit completely but over a period of 2-3 months

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